Labor and deliveries are slowly closing across the United States: California, Pennsylvania, and Ohio. In regional areas where there have been no closures, conversations in hospital boardrooms are probably questioning whether they should be. But why? Because of health care reform, increasing medical expenditures, hospitals are making less money due to reduced reimbursement, and because of the financial margin of obstetrics. To explain the complex answer further, we need to delve into some of the finances of medicine.
For a hospital to be sustainable it must draw on a profit from operations. To derive that profit, a robust positive contribution margin is needed. A contribution margin (M) is realized revenue (R) minus direct cost (C) or M= R-C. For example, for a vaginal delivery a hospital gets paid a fixed R. Therefore, the margin is what is left over after the cost of the delivery. The contribution margin should increase with increased revenue but significant volumes are also needed. Theoretically, more deliveries would lead to a higher margin and revenue. The challenges of this model for obstetrics are the slowing birth rate with the ultimate limitation for growth. Look at it another way, more individuals have cardiovascular disease than give birth.
Hospitals contract with insurance companies for a fixed payment (or R) for inpatient procedures and hospitalizations otherwise known as DRGs (Diagnosis Related Groups). Unbeknown to most physicians, these are the financial meetings where physicians are not usually invited. This is when the hospital business representatives go behind closed doors with the insurance companies and negotiate rates. Rates = R. Historically, more money is given for patient procedures that involve the heart or bones, not for childbirth.
Another reason obstetrical services have financial challenges is because of the lack of accountability (or C) and it’s not just physicians. It’s also nurses and patients. In other words, it is not our “dime” so why should we save. In the past, obstetrics has been a panacea. If the patient is ready for her baby to be delivered, frequently her labor is electively induced regardless of evidenced-based medicine, quality outcomes and cost. Unfortunately, the induction of labor includes the risk of morbidity to the mother-baby dyad. In addition, labor induction costs approximately four times more than spontaneous labor.
Money can be saved with consolidation of services (C). This applies not only to business models but also healthcare. How many labor and deliveries does a region need? Is there a proven number that proves competency? Or a number that always captures a positive margin? Do women really drive business from where they delivered? A lot of questions with debatable answers.
So, what can we do about it? Restructuring with accountable care organizations may help but that future is unclear. There are many examples in the literature that improving quality decreases cost and this is one metric we have successfully utilized. Other ways include becoming engaged and educated. Hold yourself and others around you accountable.
Finally, be an advocate for women.
Vivian E. von Gruenigen is Chair, Obstetrics and Gynecology, Akron City and St. Thomas Hospitals. She blogs at flourish.
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